it is interesting to note the involvement of purdy crawford in the ABCP crisis. It reminds me a great deal of his activity with his former tobacco company when settling charges of cigarette smuggling. According to the "Physicians for a Smoke Free Canada", those charges resulted in a "get out of jail pass" negotiated for wrongdoing executives of the tobacco companies. They also called it a "sweetheart of a deal" negotiated whereby the offending corporation was able to pocket billions from smuggling, and avoid taxes, while paying a lesser amount in penalties. Crime does pay it seems.

here is a comment about Mr. Crawford from one of the more respected names in Canadian business circles:

Purdy Crawford ‘Delusional' over ABCP dealFinancial Post

May 7, 2009

Re: ABCP Got A Great Deal, Letter to editor, May 2.

Purdy Crawford must be delusional, in my opinion, if he thinks he got a great deal for the ABCP paper investors.

He spends 18 months and only 10% of these swindled ABCP holders get their money back. This quarter, the banks who gained litigation immunity and his lawyer-colleagues steal $200-million in fees, so there's not a cent available to pay any interest.

The holders of this paper in many cases had funds frozen that had been earmarked for employment-creating capital projects. Other holders were pension funds. This paper today is no bid.

The remaining 90% of the holders can't get 1¢ on the dollar for this paper that the bankers foisted on unsuspecting short-term paper buyers.

The banks, the government and the judiciary have all played a role in dissipating $30-billion in investor funds with no recourse allowed.

Senior speaks out on the ABCP scandal"There's been a lot of personal grief around trying to make ends meet for me and mywife. The worst thing was we couldn't even afford to go to a movie. That was all I hadin the world. I think [this process] was a travesty. The people who knew that this was aflawed product, they are the real culprits and they are getting off scot free. They shouldbe going to jail for what they did." - Reid Moseley, a retired Calgary school teacher withmost of his savings tied up in frozen ABCP. Mr. Moseley said he bought the paper in2007 after selling his house, regarding it as a temporary investment that he would cash inwhen the deal on a new house closed. Source: J. Greenwood, Ruling clears way forABCP restructuring, FP, Jan.12, 2009 pg FP5

advocate comment.........the ABCP fiasco was not swept under the carpet, it was avoided by all proper authorities in Canada and left to Purdy Crawford to deal with. As the "cleanup man" who looked after the tobacco smuggling scandal in Canada, he is the perfect legal janitor to cleanup the bodies in this mess. He makes certain that noboday is held accountable, nobody gets sued and nobody goes to jail. What is the problem?

ABCP regulatory fiasco swept under the carpet-Why did the OSC not take a stand and ensure that all retail investors were given equal treatment?"It [the OSC] starts with a view that they endorse a court process and then theydon't take any steps to ensure that the court process is fair with respect to theirconstituency, which is the retail marketplace. The OSC should have been morediligent, especially given the findings of the IIROC study that showed there werebreaches of know- your- client and suitability rules. They were highly remiss in notaddressing the aberrations that were evolving in the so-called solution as itoccurred. And now they are standing by and watching the [three dozen] left-outfamilies be ultimately crammed down " - Diane Urquhart, an independent financialanalyst Source: B. Critchley, End of a shameful episode, Financial Post, Jan. 12, 2009 pgFP2 [Urquhart also said the way the OSC "protected" the ABCP retail investor interestsstands in complete contrast to how 12 U. S. states handled the US$300-billion auctionrate securities mess. Down there, the distributors and/or underwriters were made to buythem back. As well, fines were imposed. In Oct. 2008, IIROC, the brokerage industryself-regulator said in a 100-plus page report: "This study and the compliance sweep foundthat the majority of dealer members that acted in the distribution of third-party ABCP toretail investors did not understand the underlying asset composition, liquidity risks anddistinct rating methodology used for the structured financial assets underlying the ABCP.In short the dealers didn't do their due diligence or understand what they were selling”No firm has yet been held accountable by IIROC or anyone else.]

Details of the city’s long-awaited restructuring plan for its $30-million portfolio of tainted asset-backed commercial paper investments are to be made public within several days.

Now that a complicated restructuring arrangement has received final court approval, City of Lethbridge officials are to go over final details this week with representatives of National Bank, the brokerage firm that sold the investments to the city in mid-2007. City officials have withheld details of the National Bank settlement for months because the deal was contingent on the restructuring plan receiving court approval to proceed.

“Now that we’ve moved past the logjam, I think we’ll be moving toward a resolution,” said Mayor Bob Tarleck, adding details of the settlement are likely to be announced early next week. “Now we can move toward a conclusion. Our interest has always been to to protect the interests of the citizens of Lethbridge.”

After 17 months in limbo, one of the most complicated restructuring deals in Canadian history got final legal approval Monday. It allows $32 billion in short-term investments to be unfrozen and converted to longer-term notes which mature in 2016.

But the city and other non-retail investors should expect far less than they originally expected in interest payments and future market value from the replacement notes they will soon receive, according to Diane Urquhart, a Mississauga, Ont.-based independent financial analyst. “The interest flow is going to be extremely weak,” she said in a phone interview, noting that, based on current rates, the notes at the outset will likely pay as little as 0.9 per cent in net interest.

“(The City of) Lethbridge will keep getting this interest revenue, but it’s unlikely they’ll be able to sell these notes at a reasonable price,” she said. “At this point, the best I’m thinking people can hope for is 75 cents on the dollar even if they hold onto it until maturity,” she said.

Trading in ABCP has been frozen since August 2007. When trading in the new notes resumes, Urquhart expects a run-off of investors dumping the investments at losses of up to 80 per cent.

“It’s going to be vulture buying. It’s not going to be pension funds or even hedge funds,” she said.

When the city took a $5.7-million writedown on its ABCP holdings in early December, Tarleck maintained he still expected any actual loss on the investments to be minimal. He hinted Tuesday the city isn’t likely to join a possible stampede of investors looking to dump their new notes when trading resumes.

“We don’t want to be making any panic decisions that aren’t in our best interests,” he said.In the wake of the ABCP debacle, Larry Elford, a local investor advocate, called on the federal an provincial governments to hold public inquiries into what he described as failures by securities regulators to uphold their own laws. He received a letter recently from the Alberta Finance Ministry advising him his request for a provincial inquiry had been rejected.

Tarleck said he disagrees with the position taken this week by Alberta Premier Ed Stelmach and Finance Minister Iris Evans in opposing the creation of a national securities regulator to police the trading of securities in Canada. The idea was recommended earlier this week by an expert, seven-member panel headed by Mulroney-era cabinet minister Tom Hockin.

“I don’t think this is the time for provincial protectionism,” Tarleck said. “I would feel more comfortable if we had a national presence instead of a patchwork of provincial regulators.“I think protection of investor security trumps provincial protectionism.”

Meanwhile Tuesday, Hockin attempted to make the case for a single Canadian securities regulator to the Calgary business community, saying such a body would give Alberta a stronger voice on the international stage and would be modelled on that province’s laws.

“This is not a Toronto-centric report,” said Hockin, who served as minister of state for finance under Brian Mulroney.

“A system of 13 regulators is too cumbersome, too fragmented and too slow.”

The current system, he said, limits Canada’s ability to “speak with one voice” internationally and “doesn’t provide any outlet for the Alberta voice,” as Ontario regulators often represent Canada abroad, Hockin added.

The needs of Alberta-based companies to raise capital for oil and gas exploration would be addressed in a “decentralized” system, which Hockin hopes would retain many of the same staff that companies currently deal with at the Alberta Securities Commission.

In further seeking to allay Albertans’ concerns, Hockin said the panel based its draft legislation on that province’s securities act.

if I had five cents for every commentator who asks "who is to blame" for this mess.......................

personally I find it pretty damn easy to place the blame. Go straight towards to "professionals" who engineered the get rich schemes, the products, the sales tricks to take advantage of trusting and vulnerable members of the public.

If we look at:

1. regulators who allowed this2. brokers who sold this3. lenders and lending brokers who tried to lend their way to riches

etc., etc..............

we can find a vast supply of people who were supposed professionals, experts, and willing to throw all this out the window for a chance to get rich the quick, dirty and easy way. they are to blame, without question.

Stop asking who caused this. They are quite easy to find. They are in the phone book. Hold hem accountable, and for gods sake, stop bailing them out with more public money. This was a crime larger than all of the other crimes in the country combined.

Canada's market for asset-backed commercial paper remains just as illiquid as it was the day it seized up nearly 17 months ago but the lawyers and financial advisors trying to rescue it have already billed noteholders for nearly $200-million.

According to documents filed in connection with the proposed $32-billion restructuring, lawyers for the investors committee, their financial advisors JP Morgan and others had been paid or submitted invoices for $199.1-million as of Dec. 8, 2008.

The lion's share of that money -- $87-million -- is going to JPMorgan, the New York financial advisor contracted by the investor committee to figure out how to convert the $32-billion of frozen paper into long term notes.

Meanwhile, thousands of holders of frozen ABCP, including some in financial distress, are still unable to access their investments.

Lawyers for the investor committee are expected to file a motion asking an Ontario Superior Court judge to approve an amended restructuring plan as early as Tuesday, paving the way for a court hearing by the end of the week, which is widely expected to result in a positive ruling.

The revised plan is bolstered by $4.45-billion in additional margin facility to support the leveraged credit default swaps that make up the bulk of the assets underlying the frozen ABCP. The new cash is being provided mostly by the federal government, Ontario and Alberta, which has led some observers to call it a government bailout.

Observers say that if the court gives the green light to the workout as expected, it could be completed before Jan. 16, clearing the way for about 1,800 retail investors to get all their money back as part of a deal announced by Canaccord Capital and Credential Securities.

In a note to clients on Dec. 24, Canaccord chief operating officer Mark Maybank called the revised restructuring "an exceptionally important milestone in what has been a long and challenging process, but one that we have great confidence will be completed successfully."

Mr. Maybank said that under the current timetable retail noteholders would have their money returned the week of Jan. 26.

While individuals will get their money back, the rest of the noteholders are unlikely to be so lucky. Under the restructuring, the companies and institutions that hold the vast majority of the frozen ABCP will get new notes that they will most likely have to hold until they mature in 2016 since the market for investment products such as this is not expected to unfreeze.

The market for non-bank sponsored ABCP fell apart in August 2007 after investors stopped buying and the banks that had agreed to provide emergency liquidity declined to step up. That prompted a group of major investors led by the Caisse de depot et placement du Quebec to halt the market while they put together a rescue plan.

Critics complain that the restructuring is flawed because it relies on the same group of liquidity providing banks that refused to step up in August of 2007, triggering the market collapse.

The $4.45-billion of additional margin facility was demanded by players such as Deutsche Bank, Merrill Lynch and Citigroup as a condition for entering into the revised plan.

I sent the attached below to the treasury. I know you have been an outspoken supporter of the Montreal Accord settlement and having treasury support it financially.

I urge you to reconsider your position. Many of us working at the banks (who YOU will be bailing out if you support the Montreal Accord), raised our voices in concern over the Canadian conduit business. It was a travesty that foreign banks were allowed to take advantage of the Caisse and PSP so easily and willfully.

However, they should not be rewarded for their misdeeds. They cleverly colluded together to avoid meeting their obligations under the liquidity provisions embedded in the assets that they then created and sold to the conduits. Because these assets are Russian dolled away from the end-conduit investors, the details of these liquidity provisions are unknown to the investors.

These liquidity provisions should generally require the foreign banks to BUY BACK ALL THE ASSETS. Thats' right, $32billion put back to the foreign banks overnight. Problem solved!

The current settlement rewards these fiends by allowing them to continue to hide and eliminate these liquidity provisions, make accrual book loans into the collateral, and all the while protecting their historic profits, and even booking new restructuring profits.

The best solution is for the Canadian government to do due diligence these assets, put them back to the Banks, and lend money to the banks to support the assets. Not continue to support the greatest fraud in Canadian history.

I am a former CDO practitioner who had worked at 2 of the foreign banks that created the "Leveraged Super Senior" assets that were sold to the Canadian Conduits. These were hugely profitable transactions for these firms as a result of the investors (conduits as a proxy for their lenders) did not fairly value the assets sold to them. These assets were inappropriate for any other investor because they had a market value trigger embedded in them that only DBRS of all rating agencies would rate. Don't be fooled. If Canada is going to back this rescue, it should know that it was well known internally at these firms that the non-bank Canadian Conduits were behaving foolishly.

You might be lulled into thinking that these banks provided liquidity and would support the "par" market for these assets. You would be wrong. These banks conspired to limit the application of their liquidity backstops. This is similar to the Auction Rate market in the US, where investors thought the banks who made the assets would buy them back. There was no explicit provision in the auction in the market for liquidity as in the US conduit market or the CAD conduit market. However the explicit CAD conduit liquidity language was caveated by the definition of a "MARKET DISRUPTION". IT is this definition that has let DB and the original asset sellers off the hook. They are relying on their interpretation this language which is well disguised out for them. The old language defined a Market Disruption as ALL conduits failing, including the bank sponsored ones. DB in particular quickly realized this was an impossibility unless the CAD banking system collapsed. SO DB KNEW IT WAS SELLING THESE ASSETS WITHOUT ANY LIQUIDITY BACKSTOP, BUT ALLOWING THE INVESTORS TO ASSUME THEIR WAS.

DBRS realized its stupidity and changed the MARKET DISRUPTION requirements to be defined as 2 Conduits failing. DB and the original manufacturers of assets promptly pulled out of the market. Others including Merrill, Barclays, and HSBC, entered with the knew language. THE ASSETS MADE IN 2006 BY THESE BANKS SHOULD BY ANY LEGAL INTERPRETATION BE BOUGHT BACK AT PAR BY THESE BANKS. The rush to put a standstill on these conduits gave them an out.

BEFORE YOU LEND TO THE RESTRUCTURING, PLEASE INVESTIGATE THESE ASSETS AND MAKE YOUR OWN DECISION AS TO WHETHER THE FOREIGN BANKS SHOULD BE BUYING BACK THESE ASSETS AT PAR, AS IN THE US AUCTION MARKET.

This was a scam, and the banks knew it. By allowing them to make loans to the re-structuring and change the terms, you are allowing them new windfalls. I know, for example, that DB is booking EURO 125,000,000 of profit from the re-structuring.

It would be funny, if it were not for the fact that soo many lives have been altered and damaged. I am referring to the travelling circus called the "pan canadian investors group", headed by Purdy Crawford. They should call themselves the "get out of jail pass" group, and the name might more resemble what he has accomplished.

How?

First he convinces some 2000 abused investors that the only way they will get their money back is to sign away their rights to sue. A bit like a blackmail deal, but welcome to the Canadian financial system, that is the way we are allowed to operate up here so live with it.

He gets these poor, unsuspecting folks to give up this right, and then no sooner than that is accomplished, the promise of a return of their money is gone. Poof!

The man is magic in action. Nobody quite like him. thank god.

In a previous deal, he was the chairman of Imasco, which owns Imperial tobacco. Caught in a cigarette smuggling operation worth billions upon billions in tax evasion, he was able to negotiate what some call another "sweetheart deal", for those responsible. And more "do not go to jail passes", for those who he works for.

I am not certain that his track record justifies an Order of Canada. Perhaps a commission of inquiry, but not an order of Canada. I see a man who is slick and able to manipulate the system for the advantage of those who pay him...........not a man who appears interested in serving Canadians. Perhaps there is much about the man that I dont know, but what I do know gives me a sick feeling.

A proposal that the federal government provide a bailout for a restructuring of $32-billion of frozen asset-backed commercial paper has sparked anger among some holders of the frozen notes, who say that taxpayers' money should not be used to fix the problem.

"We were let down by the institutions who sold us this stuff and we were let down by the institutions who made this stuff; I don't see why they should be bailed out," said Brian Isler, a Toronto-based lawyer with $229,000 of his savings tied up in the frozen notes.

Members of the so-called Pan-Canadian Committee overseeing the massive restructuring met with Finance Department officials this week to plead for financial assistance to prevent the plan from falling apart, sources said.

The government is being asked to provide several billion dollars to cover potential margin calls on leveraged credit default swaps underlying the frozen ABCP. Failure to meet such a margin call would result in a collapse of the restructuring, which has been in limbo for nearly 16 months.

"There should be no bailout," said a senior executive at a company with more than $60-million of frozen notes. He said that instead, a clause in the restructuring taking away noteholders' ability to sue investment dealers who sold the stalled ABCP should be removed.

"They should just give us back our legal rights and we will deal with this," said the executive.

Even though the Finance Minister, Jim Flaherty, has said he would prefer a market-led solution, a spokesman for the Minister said that the federal government "takes a keen interest in maintaining financial stability and the health of our capital markets."

The spokesman added: "The role all along has been to support discussions among the parties and encourage progress."

While Mr. Flaherty may prefer to stick to his position, he can't ignore the storm in financial markets that has become so severe in recent months that, according to some insiders, the plan that was mapped out at the end of last year might not survive.

The ABCP market fell apart in August, 2007, after investors stopped buying the notes over fears that they might be linked to subprime mortgages. Under the restructuring, spearheaded by the Caisse de depot et placement du Quebec, the frozen ABCP would be converted to longer term notes.

All along one of the main stumbling blocks has been the leveraged credit default swaps that make up the largest chunk of assets underlying the ABCP. As part of the restructuring, the banks and institutions backing it agreed to put up $14-billion to cover potential margin calls on the CDSs. That was considered more than sufficient backing in the spring when the details were hammered out, but since then credit conditions have worsened so much there is concern that it won't be enough.

The spotlight is mostly on a group of foreign banks on the other side of the CDS deals. They're the ones who will make the collateral calls, and right now they are in no position to make concessions. In recent months, several have been bought or accepted government bailouts.

"Those banks would want to protect the new money that has been put into them, and to do that they would want to collect on all money that is owed to them," said Diane Urquhart, an industry expert working for some of the noteholders. "To the extent these banks have offered margin facilities; they would be examining the credit integrity of that margin facility. This is the new dynamic."

It is time for Purdy Crawford, voted the person of influence by the Canadian Investment Awards on Dec. 9, to earn his share of the estimated $132-million in fees from investors' money that has been spent on restructuring the third-party asset-backed commercial paper market.

Crawford was feted for developing "a solution to a very challenging ABCP challenge that, when implemented, will benefit both industry and investors alike in a way even the U. S. financial markets have yet to achieve. The impact of this contribution will be felt beyond the financial services industry for many years and Mr. Crawford more than deserves to win the most influential person of the year award," the group overseeing the awards gushed.

The only problem is that the "person of influence" hasn't pulled it off yet, and if media reports are true, then his latest trip to the federal Finance Department with cap in hand, asking for a government bailout of the frozen $32-billion market, smacks more of desperation, than influence.

If the 76-year-old legal icon at Osler Hoskin & Harcourt appeals to anyone for a handout, maybe it should be the Quebec government, since most of the players reside there.

It's been 16 months since the third-party ABCP market froze, and countless deadlines have been missed. The transparency that Crawford promised to bring to the ABCP market last Christmas is as opaque as the Chinese government.

Investors are being told little about what the holdup is. First, it was a lot of documents to sign and not enough time to get them drafted and vetted. Now it appears that declining credit markets have again upended the restructuring life raft. His influence with foreign banks seems waning.

Rather than tell that to investors, the Committee buries it in monitor reports or keeps that information tightly held by the ruling cabal that ordained itself as the official overseers of the ABCP restructuring -- the signatories to the Montreal Accord.

No wonder the investment community named Crawford the person of influence; he has invented the perfect situation for them -- stasis. Good for the financial players involved in this market, bad for the corporate and retail investors that have been denied access to their money for months and the ability to seek redress.

Right now, limbo rules. Nobody can sue to force anyone to negotiate. Since it's in creditor protection, the banks that created the products are safe. The financial investment firms that sold the paper, and apparently face regulatory prosecutions according to the Ontario Securities Commission, are shielded from lawsuits that would expose their role in it.

The pension funds that stand to be embarrassed for losing pensioners' monies are neatly protected. The foreign banks, which would also likely face lawsuits, continue to hang at the table paying lip service to the deal. Why not? The legal protection carrot offered at the end of the day, if everyone sticks around, makes it worthwhile to drag it out, because that's what lawyers do.

And it could be quite a while before this is resolved. Article 11 of the plan of arrangement, which proposes to turn the frozen paper into long-term notes, gives the Pan-Canadian Investors Committee the "exclusive right to amend" the plan prior to the implementation date, provided they get the written consent of the asset providers and the financial institutions providing the margin funding facility. They have to tell the noteholders about any amendment, and the court has to approve the amendment, but there's nothing that says retail investors will have any more say in what happens. This can drag on forever under the current scenario.

Meanwhile, nobody knows what the true value of this paper is worth, and financial institutions holding it continue to carry it on their books at likely inflated prices, further distorting values.

What we do know is that, according to the recent monitor's report, as of Aug. 31, 2008, there is $6-billion in cash on the books and growing. That's about 20% of the value of the market at the time it froze.

Maybe it's time Crawford uses his influence with the community that rewarded him in December and turn his guns on the real culprits, the Canadian institutions that used wonky rules to issue this paper.

Or maybe he should be influencing his pals at Canada's regulators, which have been notably absent in this saga, and get them to exert pressure on the market participants to do the right thing. They should be the ones to take the paper back on their books, pay out the corporate and retail investors suckered into buying it with questionable AAA ratings. Then they can fight it out among themselves for the table scraps through the CCAA process or until they can no longer afford to pay their litigators.

At the time of his award, Crawford said, "managing the ABCP restructuring is an incredible challenge and it is wonderful to be recognized for this effort. At some point in the near future, some 1,850 retail investors -- individuals with less than $1-million at stake-- will see the ABCP deal close.... These retail investors will get their money back, plus some interest."

So how near in the future do retail investors have to wait before they see the efforts of his influence? Ask retail investors and they'll tell you not soon enough.

(advocate comments.........once again Purdy has done a remarkable job of protecting his charges from jail and lawsuits. He did it before this for Imperial tobacco, charged with smuggling cigarettes. He is a real great cleanup man, if you have some bodies you want buried without recourse. Why is that something for which one gets an order of canada? We seem to be a bit mixed up about what public service truly is.)

The Conservative government is facing another call for financial help, this time to provide as much as $5-billion to $10-billion in federal backstops to salvage a frozen sector of the debt market and avoid a meltdown that could lead to massive losses for many Canadian investors.

The committee overseeing the restructuring of $32-billion of the seized-up short-term investments known as asset-backed commercial paper is asking for the aid after plunging markets this fall put a plan to fix the market at risk, according to two people familiar with the situation.

The paper has been frozen since August, 2007, when it was one of the first casualties of the economic crisis that has swept the globe over the past 16 months.

The restructuring committee, led by Toronto lawyer Purdy Crawford, met Wednesday with Finance Department officials to ask for help, with the exact amount of aid sought still undetermined. Under the plan being pitched, the government wouldn't have to write a cheque up front, but would potentially be called upon to cover losses if markets continue to tumble.

The request for federal help with fixing the asset-backed commercial paper mess is sure to be controversial, coming on the heels of similar requests from auto makers, forestry companies and banks.

“It's not the same as the car companies,” said one person briefed on Wednesday's talks. “There's no cheque. If you give $6-billion to the car companies you don't know if you'll see any of that back. Here all you have to do is stand by and say ‘If there's losses, I'll cover a portion of it.'”

Ottawa would be called upon only in extremely dire circumstances. “It would have to be worse than the Depression,” the person said.

At risk if the restructuring fails are the savings of hundreds of individual Canadians who bought the paper before the market froze, as well as potentially billions of dollars of losses for some major pension plans that invested in ABCP. Those include the Caisse de dépôt et placement du Québec and the Public Sector Pension Investment Board.

Still, the idea of federal aid for ABCP investors is already threatening to drive yet another economic-policy wedge between the Conservative government, which is signalling it would still rather stay on the sidelines, and the opposition Liberals, who criticized that stand.

The ABCP plan has been hung up for months waiting for the financial institutions whose backing is crucial to sign the final documents to complete the restructuring.

The problem is that markets have worsened more than expected by the players, which include major banks in Canada and around the globe that have already pledged billions in credit and concessions. That means the deal needs to be restructured and made stronger with the addition of more financial backing.

With financial institutions strapped for cash and unwilling or unable to contribute more, the committee has turned to the government.

The Harper government has so far maintained that the ABCP plan is a private-sector solution, and played a role mainly as an observer to the restructuring talks.

Finance Minister Jim Flaherty was initially resistant to the calls for help, sources said, in part because he was reluctant to back away from his public statements and speeches lauding Canada for solving the financial mess without public money.

In the wake of political turmoil in Ottawa and deepening woes in the economy, sources said, the government has been more open in recent weeks to requests for help.

“The Finance Department is much more engaged,” said a second person familiar with the discussions.

Still, the official line from Mr. Flaherty's office Wednesday was that the government is trying to avoid putting any cash at risk.

“From the beginning, the minister has said a market-led restructuring is a preferred course of action for investors and capital markets in Canada, one that does not depend on taxpayer dollars,” Chisholm Pothier, Mr. Flaherty's spokesman, reiterated Wednesday.

By contrast, the Liberal Party, which has chastised the Harper Conservatives for a perceived unwillingness to spend and risk a deficit to help the economy, is on side with helping out.

“This transaction is important to protect Canadian savings and the solidity of our financial institutions,” Scott Brison, the Liberal Party's industry critic, said. “The Harper government ought not let its laissez-faire ideological rigidity prevent a real solution.”

Brian Hunter, an Alberta oil and gas engineer who has been among the most vocal of the individual ABCP investors, said he has been lobbying Ottawa to step in.

The health of the ABCP market affects all of Main Street Canada, including pension plans, said Mr. Hunter, who has hundreds of thousands of dollars still locked up in frozen paper.

“The government bailed out the Canadian banks. Do I think they should bail out the shareholders of the Canadian banks and not me? Of course not.”

WASHINGTON – The full scope of the housing meltdown isn't clear and already there are ominous signs of a new crisis – one that could turn out the lights on malls, hotels and storefronts.

Even as the holiday shopping season begins in full swing, the same events poisoning the housing market are now at work on commercial properties, and the bad news is trickling in. Malls from Michigan to Georgia are entering foreclosure.

Hotels in Tucson, Ariz., and Hilton Head, S.C., also are about to default on their mortgages.

That pace is expected to quicken. The number of late payments and defaults will double, if not triple, by the end of next year, according to analysts from Fitch Ratings Ltd., which evaluates companies' credit.

"We're probably in the first inning of the commercial mortgage problem," said Scott Tross, a real estate lawyer with Herrick Feinstein in New Jersey.

That's bad news for more than just property owners. When businesses go dark, employees lose jobs. Towns lose tax revenue. School budgets and social services feel the pinch.

Companies have survived plenty of downturns, but economists see this one playing out like never before. In the past, when businesses hit rough patches, owners negotiated with banks or refinanced their loans.

But many banks no longer hold the loans they made. Over the past decade, banks have increasingly bundled mortgages and sold them to investors. Pension funds, insurance companies, and hedge funds bought the seemingly safe securities and are now bracing for losses that could ripple through the financial system.

"It's a toxic drug and nobody knows how bad it's going to be," said Paul Miller, an analyst with Friedman, Billings, Ramsey, who was among the first to sound alarm bells in the residential market.

Unlike home mortgages, businesses don't pay their loans over 30 years. Commercial mortgages are usually written for five, seven or 10 years with big payments due at the end. About US$20 billion will be due next year, covering everything from office and condo complexes to hotels and malls.

Those retailers typically were paying rent that was expected to cover mortgage payments. When those $20 billion in mortgages come due next year – 2010 and 2011 totals are projected to be even higher – many property owners won't have the money.

Some will survive, but those property owners whose loans required little money up front will have less incentive to weather the storm.

Refinancing formerly was an option, but many properties are worth less than when they were purchased. And since investors no longer want to buy commercial mortgages, banks are reluctant to write new loans to refinance those facing foreclosure.

California, New York, Texas and Florida – states with a high concentration of mortgages in the securities market, according to Fitch – are particularly vulnerable. Texas and Florida are already seeing increased delinquencies and defaults, as are Michigan, Tennessee and Georgia.

The worst-case scenario goes something like this: With banks unwilling to refinance, a shopping centre goes into foreclosure. Nobody can buy the mall because banks won't write mortgages as long as investors won't purchase them.

That drives down investments already on the books. Insurance companies are seeing their stock prices fall on fears they are too invested in commercial mortgages.

"The system has never been tested for a deep recession," said Ken Rosen, a real estate hedge fund manager and University of California at Berkeley professor of real estate economics.

One hope was that the United States. would use some of the $700-billion financial bailout to buy shaky investments from banks and insurance companies. That was the original plan. But Treasury Secretary Henry Paulson has issued a stunning turnabout, saying the United States no longer planned to buy troubled securities. For those watching the wave of commercial defaults about to crest, the announcement was poorly received.

"He's created havoc in the marketplace by changing the rules," Rosen said. "It was the stupidest statement on Earth."

The U.S. Securities and Exchange Commission is considering another option that might ease the crisis, one that would change accounting rules so banks don't have to declare huge losses whenever the market declines.

But the only surefire remedy is for the economy to stabilize, for businesses to start expanding and for investors to trust the market again. Until then, Tross said, "There's going to be a lot of pain going forward."

It's been more than a year since $32-billion of assetbacked commercial paper froze up and despite a massive restructuring effort, noteholders have yet to get any of their money back. The lawyers and advisors have been more fortunate.

According to documents obtained by the Financial Post, lawyers and financial advisors putting together Canada's largest-ever restructuring accrued fees of $89.1-million for work performed from the time the market fell apart in August, 2007, until the end of April.

In the seven months since April, the legal bill has continued to grow as the workout was approved in Ontario Superior Court and again the Supreme Court of Canada, so it is likely the final tally will be well in excess of $100-million.

"It's obviously disappointing that so much money has been expended and yet the noteholders who were the victims of this situation haven't gotten any money yet," said Ted McFeely, a Calgary-based investor with $388,000 of his savings tied up in stalled ABCP. "I'm fortunate because I don't need these funds for day-to-day living. I know there are a lot of people who aren't in my situation and I know it's creating a great deal of hardship for them."

Meanwhile, a spokesman for the investor committee overseeing the restructuring said the process is "on track" to be completed within the next few weeks.

"There won't be any surprises," said David Weiner. "It's roughly on track for the end of the month, early December at the worst."

Under the restructuring, the frozen paper will be converted to long-term notes maturing around the middle of the next decade. However, because of the collapse in demand for so-called structured credit products, many observers are skeptical about the chances of a secondary market developing for the restructured notes.

The plan was originally scheduled to close in the fall of 2007. Proponents blame the numerous delays on the complexity of the plan and the unprecedented turmoil in financial markets. Purdy Crawford, the head of the investor committee, said the last deadline set for the middle of last month was missed because parties to the restructuring were taking too much time over signing of documents.

Despite the meltdown in the ABCP market, the assets underlying the notes have continued to gather interest. At the end of April, there was $946.6-million of interest left for noteholders after fees were paid to lawyers, financial advisors and the sponsors of the ABCP trusts.

The lion's share of the notes are held by institutions and pension funds such as Caisse de depot et placement du Quebec. However, about $300-million is held by individual investors. As part of the restructuring, they will have their ABCP bought back at face value by the selling brokers, including Canaccord Capital and Credential Securities.

Another sick thing; Deutsche Bank who structured about 40% of this business and made about $500million off of the naive pension funds, is making another $150million off of the restructuring! They are giving it to the Canadian population twice! The bankers and lawyers involved are making a fortune for grabbing Rousseau by his privates.....

The vast majority of the non-bank Canadian ABCP market had nothing to do with the subprime crisis in the States. The reason it failed was that it was a tinderbox. The assets sold to conduits were always were worth less than the sale price. The manufacturing banks created them for 90cents and sold them for a dollar. Agreeing to buy them back if the Market disrupted. The language they agreed to with the Conduits and DBRS relied on a single word to keep the market disruption from ever being possible: they said ALL conduits must fail. Unfortunately the investors never saw this, as they bought paper from the conduits. This is racketeering and much worse than anything that went on in the States. Fortunately for those banks, the head of a Quebecois pension plan had his whole career to lose if it came out how stupid he was an dhow much he lost. Below is further background on this conspiracy to defraud Canadian short term investors. Maybe the regulators will learn to look out for such fraud going forward. Why Rousseau, DBRS, Deutsche Bank, are still permitted in Canada is a good question for the conspiracy theorists.

The Leveraged Super Senior Trade was invented around 2004. It was an idea to leverage the super senior tranche of a synthetic cdo. For some background: a synthetic CDO basically was like any CDO in that various tranches of risk and reward were created from underlying assets. CDOs can be seen as a financing structure for the "equity" holder. That is the investors taking the most risk were leveraging their investments in the underlying by issuing non-recourse debt in various tranches (these could be seen as attaching above the equity holder, successively).

In the late 90s, JP Morgan innovated the synthetic CDO whereby the financing element went away. That is, it look at a CDO as a risk sharing device, with the senior most holders having the least amount of default risk. Most or even ALL the underlying assets had to default for the Super senior holder to suffer a loss. the innovation that JP brought to thge market was that the underlying assets were no longer cash assets but were credit default swaps. The actual assets that the default swaps referenced, never left JP's books but were "synthetically" as individual CDS to the CDO. The CDO then issued notes to investors linked to various risk classes to hedge the CDS it sold to JP.

This structure was very successful and creating risk takers for CDS. Over time another innovation occured after the credit crisis of 2002, the single tranche CDO, to over coem the lack of equity and super senior investors in the market as a result of the crunch. In this structure, investment banks built a "correlation model" which allwoed them to value each tranche individually and then delta hedge the tranche. Most investors bought tranches rate A, AA, and AAA, but not the unrated equity or the low spread super senior.

As this business grew, hedge funds started taking the equity tranches to allow investment banks to remove their risk to the middle tranches and the models, but there were few super senior players. Even hedge funds would trade this because small spread movement could have big marked-to-market losses. This is because the notionals were huge.

A new product was created in 2004, the Leveraged Super Senior transaction which leveraged the spreads of super senior tranches so that typically AAA structured note investors could buy them. So if a $1billion CDO had a 0-5% equity tranche ($50mm), 5-15 mezzanine tranche ($100mm), and a super senior tranche of 15-100% ($850mm), the bank could sell a 10x levered $85mm super senior tranche. With single tranche technology, the investment banks just started selling the levered super senior tranche. Because they could use their derivative models to leverage the transaction 10X, if the fair spread was 10bps for the 85-100% and they paid 60bps, they made 40bps on the levered note. Investors loved it because it appeared to be very safe (it needed 15% losses on corporates, an unheard of number) and usually only de-levered if defaults exceeded a certain amount.

The problem was that by giving investors default-based leveraged, the investment banks were not hedging their mark-to-market risk. They had to wait for actual defaults to happen before the LSS notes de-levered, rather than spread widening. SO, the Investment Banks began to use spread based leveraging.

Deutsche Bank invented this structure. The problem with spread based leveraging was that it was much, much riskier, and no credible rating agency would put a rating on it. A, AA, AAA investors wouldn't ouch this toxic stuff, and the agencies knew better than to try to rate single tranche spread risk. Well, all except for one. One that was only credible in Canada, DBRS.

DBRS is pretty much an irrelevant agency except for the Canadian conduit market. By putting a rating on single tranche spread risk, DBRS allowed investors who used their rating to invest in full mark-to-market leveraged super senior tranches. The only investors who used their ratings were the Canadian Conduits.

Now their was one sticking point on selling LSS notes to Canadian conduits. They required liquidity language. Now most ratings agencies require strict liquidity language suggesting that if you sold paper to the conduit, you could have to take it back. This is fine if you are really just trying to get short term financing, but if you are trying to sell a risk transfer transaction like a single tranche CDO, you are not transferring risk if you might have to buy the paper back.

However, DBRS became a big rating agency in Canada for a reason. It had created a liquidity loophole. It said that only on a "market-disruption" must a liquidity provider buyback the notes. How did they define this market disruption? They let the individual liquidity providers define the "market disruption" and approved it or didn't. So for LSS, who were the liquidity providers? The investment banks that created the risk transfer notes! How could they sell a risk transfer note and provide liquidity (ie, not really transferring the risk)? They created market disruption language such that they were not really providing liquidity! The market disruption that Deutsche drafted and DBRS approved required ALL the conduits in Canada to fail. That is, even those backed by RBC, CIBC, etc. It required that ALL the Canadian banks would have to fail!

The brilliance of this arrangement was that now Deutsche Bank could sell billions of LSS notes with full risk transfer to the Canadian Conduits, book huge profits for this enormous risk transfer, and not have to worry about the notes coming back toi them, unless the nation of Canada collapsed!

How much? Well let say roughly $15billion CAD of notes. Not too shabby. they were levered 10X, so they represented $150billion of single CDO tranches. Or $150billion of risk transfered to the Canadian Conduits. Even better...they were not 15-100% tranches. They were on average 20-30% tranches. They represented a 10% slice of a $1.5 trillion CDS underlying the transactions.

Other banks jumped, and sold another $15billion or so. So the Canadian Conduit market had exposure to approximately $3 trillion of CDS. Canada became one of the largest CDS outlets in the world. Best of all, no one knew it. The conduits issued notes to investors and the conduits bought the LSS notes. This is why the I-banks kept all the transaction information confidential behind closed doors. You are talking about one of the greatest financial scandals on the planet. CDP alone was probably the biggest CDS player int he world, without knowing. Its $12billion of notes, represented $1.2 trillion of CDS. For which they got paid pennies. If they had given that kind of capacity to a smart hedge fund, the retirees of Quebec wouldn't have had to make any more contributions, they would have doubled their fund value! Because they invested with doing proper due diligence, they were scammed. Embarrassingly, one man's shame (the head of CDP) was allowed drive the investigation and settlement of these losses and a solution which allowed him to hide the losses.

Now, are they to blame or are the Investment Banks who created risk transfer transactions embedded in notes worth far less than par and then sold as par AAA DBRS rated notes to blame. In the US, they are figuring that out now with their Auction Rate deceit. When will Canada learn?

For more background on this scandalous business, see PIMCOs writeup from early 2007:

First Ministers' Meeting on November 10 - The Bank of Canada should give liquidity support for ABCP now

Edition of Saturday 01 and Sunday 02 November 2008

Thousands of employees are not getting the full value of their pension because of the asset back commercial paper (ABCP) crisis since August 2007. Some are wondering why. Others don’t know how they will manage their way out of this crisis. But none could have imagined one moment that they could not get what they worked for all their life. And now, they have become hostages of a legal imbroglio caused partly by the federal government.

The Canadian government has come to the rescue of banks to refinance their mortgage portfolio ($25 billion dollars) and guarantee loans between banks ($218 billion). The Bank of Canada has opened the door wide to provide any needed liquidity to banks, brokers and money market funds in the form of repurchases. But the plight of pensioners has been forgotten.

More than a hundred pension funds in Canada have invested their cash directly or through their manager in commercial paper backed by financial assets. About $16 billion in total. This was not by greed, but by fiduciary duty to maximize the return on assets to their participants. A possible error, but there was also a tragic lack of information in this fully deregulated market.

There are big names among those pension funds: Domtar ($455 million), Ontario Teachers ($60 million) and plans for university professors of Western Ontario ($30 million), Alberta (over $40 million) and British Columbia, the pension fund of credit unions ($60 million), Canada Post ($27 million), but also more pension funds managed by the Caisse de dépôt et placement du Québec ($12,600 million) and the Public Sector Pension Investment Board ($1,972 million). The worst affected are those that are being liquidated. The time has indeed come for them to devote themselves mainly to the payment of pensions. The "hiccup" is that some or all of their assets are completely frozen since August 2007, when traders fled the market. These funds are cash poor, without being able to borrow money because nobody wants this paper as collateral.

There is currently $ 35 billion of commercial paper backed by assets (ABCP) in circulation, issued by non-banks in Canada, of which $32 billion are part of the restructuring plan of Purdy Crawford. These include $22 billion dollars in synthetic form, whose fate depends on the goodwill of major banks.

These securities are subject to two problems: a credit problem and a liquidity problem. The problem of credit highlights the risk of not recovering the prinicpal because the borrower or the issuer of ABCP, would find it difficult to repay the investor. The liquidity problem occurs when holders of ABCP can no longer sell or exchange their paper expired because of uncertainty about the market for similar financial instruments. The liquidity problem is far more serious.

Swords of Damocles

Two swords of Damocles are hanging over the restructuring initiated in August 2007.

First, holders of ABCP remain exposed to margin calls if the rate differential that serves as the trigger is reached. This assumption, which appears unlikely at the outset, saw its probability increase as the global situation worsens with the triple crisis (liquidity, credit, economic). We have reached 70% of that level, quite unexpected here six months ago.

Secondly, Ottawa withdrew in November 2007 financial instruments and derivatives from the list of creditors that a judge can usually keep under administration of the Companies' Creditors Arrangement Act (CCAA) to ensure fair treatment (imitating the amendment adopted in the United States in 2005 that would have increased market volatility, according to several specialists). The problem is that no transfer of responsibility has been made to the regulators and that ABCP holders are between two chairs.

Nobody is responsible for these derivatives. And today, large international banks, including Deutsche Bank, HSBC and RBS, which were at the same time ensuring the liquidity of these papers and providing the assets, are completely beyond any court order and any legal schedule. You should know that without this "exemption", the court would never have addressed the holders ABCP as they were. The "Crawford” agreement is an agreement imposed by banks on non-bank trusts! In other words, unless an amicable agreement controlled by these banks continues, the restructuring arrangement is still difficult.

On the other hand, the liquidity pressure forces several pension fund owners not to manage their entire portfolio optimally and not to complete their full fiduciary responsibility. Indeed, even if they could sell the new paper structured on the market, the $22 billion in collateral assets is worth not more than 40%, or less than $10 billion last March. The situation is worse today, even if the accountants permit the new standards adopted last week to assess their paper on a fair value in the long term. But this game of ostrich does not change the market today.

Even if the restructuring of the ABCP instruments succeeds in the longer term , with a single credit rating (the DBRS), while two are required (S & P and Moody's have declined), the capital for years to come (until nine years) in these illiquid securities will not be deployable elsewhere. Moreover, the lack of liquidity may force some investors to sell assets at the wrong time, for example, just after a sharp decline in the market to fulfill their obligations. Pension funds that should ensure significant monthly pension payments may easily find themselves in this situation. This especially applies to funds in liquidation whose number would reach more than fifty.

What the Bank of Canada Can Do

In this context, we call on Prime Minister Stephen Harper and Governor of the Bank of Canada Mark Carney to recognize the liquidity needs of other stakeholders in the Canadian capital. The injection of $16 billion dollars, which are frozen, would make an important contribution, without harming the settlements already reached with small-scale ABCP noteholders. This is probably one reason why the central banks of several countries have already announced programs to accept as collateral asset backed securities that have lost their liquidity.

Why not?

Why does the Bank of Canada not do the same? Governor of the Bank of Canada Carney, has never prevented banks from selling ABCP to the pension funds. And yet, your bank came to their rescue. Why does this liquidity support not apply also to pension funds that have become victims of this paper?

And it does not cost much to the central bank since, in such a program, investors continue to assume the credit risk. The bank would ensure liquidity. Such a decision would have a considerable leverage effect to use a key word in finance (the effect of which has caused so much of a nightmare!). There would be improved confidence of citizens towards their capital markets and retired victims will recover their rights to a full pension.